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Investment Overview for EMC (NYSE:EMC)

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Below are key drivers of EMC's value that present opportunities for upside or downside to the current Trefis price estimate for EMC:

Storage Hardware

EMC's Share of gigabytes in the Storage Hardware Market: EMC's storage hardware market share rose from 25% in 2010 to over 31.4% in 2012. It remained at nearly the same level in 2013 at 31.5%. We currently forecast EMC's storage hardware market share to increase to just over 32% by the end of the Trefis forecast period. However, there could be 5% upside to the Trefis price estimate if EMC's market share rose to 38% by the end of the decade.

Storage Gross Margin

Storage Gross Margin: We currently forecast Storage Hardware gross margin to reduce from its 2013 levels of 55% to about 47% by the end of our forecast period. This is mainly due to intense competition in the storage hardware segment leading to margin pressures. However, if the combined gross margin across the storage division for hardware, software and services declines to only about 50% by the end of out forecast period, there could be an upside of 10% to the Trefis price estimate for EMC's stock.

For additional details, select a driver above or select a division from the interactive Trefis split for EMC at the top of the page.

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EMC makes money by selling storage hardware, software and services primarily to large size businesses, but have also started catering to small and medium businesses in recent years. EMC's storage hardware helps customers manage data more efficiently and keep the information available and secure. The disks are used for large, data-intensive applications like e-mail, inventory, supply chain, backups and regulatory and compliance information.

EMC's storage software enables customers to use all features and functions related to data storage. Software ships along with the hardware system but is priced separately.

Desktop and server virtualization software is a growth area for EMC. EMC owns 80% of VMware, which is the leading provider of virtualization software used to run software applications. Virtualization allows software to be run independent of the operating system on the PC or server hardware executing the application by "virtualizing" the underlying hardware resources. Virtualization allows multiple "virtual" machines to be run on a single physical machine, sharing the resources of that single computer across multiple environments. Further, these different virtual machines can run different operating systems such as Microsoft Windows, Linux or Mac OS, and multiple applications on the same physical computer

Despite being commonly thought of as a hardware company nearly 70% of EMC's value comes from the software and services it sells to manage and optimize core hardware.

Hardware vs. Software & Services

Although the sale of storage hardware generates the most revenue for EMC, the higher profitability of storage software and services is responsible for much of the stock's overall value. All three segments benefit from the forecasted exponential growth in electronic information over the next few years.

Profit Margins

We forecast that the information storage segment will have a gross margin of 54% in 2014, slightly lower than 2013. Gross margin will continue to decrease steadily to 47% by the end of the forecast period, due to the significant pricing pressure that storage hardware has experienced in recent years. In comparison, other segments such as VMware, content management software and information security software (RSA) are expected to have gross margins of over 60% over the same time period.

Storage Hardware & Software Markets

The storage hardware market (internal plus external storage) in terms of Gigabytes (GB) of storage is expected to grow from over 27 billion GB in 2013 to nearly ~130 billion GB by the end of our forecast period. However, the value of the storage hardware market is expected to grow more modestly due declines in pricing per GB of storage. The storage software market is expected to grow at around ~5% annually from ~$14.5 billion in 2013 to nearly $20 billion by 2019.

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Ongoing Server Virtualization

At a very fundamental level, virtualization increases utilization of hardware resources, decreases cost and increases ease of managing multiple applications. VMware's server virtualization technology decouples the software from the underlying hardware, and enables aggregation of multiple servers, storage infrastructure and networks into pools of resources that can be delivered dynamically, securely and reliably to applications as needed. In addition to servers, VMware intends to virtualize storage which directly affects EMC's storage software division.

Continued Exponential Growth in Digital Information

We believe that all digital information created and replicated each year is growing at an average annual rate of nearly 60%. The number of total global Internet users has risen ~5x from 360 million users in year 2000 to over 3 billion Internet users in 2013, implying an annual growth rate of 18.4%. The storage demand generated by the rising Internet usage is expected to remain high over the forecast period.

Trefis Forecast Rationale for Storage Gross Margin

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${forecast} represents the gross profit of this division as a percentage of its net revenue. Gross profit is determined as revenue minus cost of goods and services sold and adjusted for corporate reconciling items provided by EMC.

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${forecast} increased from 52.8% in 2010 to 55.8% in 2012 before declining to 54.8% in 2013.
We expect ${forecast} to gradually decline and reach 47% by the end of the Trefis forecast period.

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The increase in years prior to 2012 was due to the shift from pure hardware to the included software in products. However, the growth in storage software sales has been low since 2012. The decline from 2012 to 2013 was driven by a higher increase in low-margin services and maintenance revenues compared to software or hardware sales.

We expect service-based maintenance revenues to grow more than pure software revenues, which are stagnating. Consequently, we expect ${forecast} to decline gradually.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.

We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

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